Business a changing world 7e by ferrell chap016

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Business in a
Changing World

Chapter 16

Financial Management and Securities
Markets
2
McGraw-Hill/Irwin

Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights


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Sears Holding Corporation –
Using brand names to create
bonds

Sears Holding Corporation (SHC) parent of Kmart
and Sears, Roebuck and Co.

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Current Assets and Current Liabilities
• Current assets -- short-term resources

–
–
–
–

Cash
Investments
Accounts receivable
Inventory

• Current liabilities -- short-term debts
–
–
–
–

Accounts payable
Accrued salaries
Accrued taxes
Short-term bank loans

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Current Assets

Working capital management – managing of
short-term assets and liabilities.

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Managing Cash

Transaction balances – cash kept on hand by a firm
to pay normal daily expenses such as employee
wages and bills for supplies utilities.
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Managing Cash

Lockbox – an address, usually a commercial bank, at
which a company receives payments in order to
speed collections from customers.
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Going Green or Greenwashing?

Eco Chic line – products made with organic materials. The Pottery Barn
collection.

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Managing Cash

Marketable securities – temporary investment of
extra cash by organizations up to one year in U.S.

Treasury bills, certificates of deposit, commercial
paper, or Eurodollar.
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Managing Cash
Treasury bills– short-term debt obligations the
U.S. government sells to raise money.
Commercial certificates of deposit (CD’s) – issued
by commercial banks and brokerages available in
minimum amounts of $100,000 and can be traded
prior to maturity
Commercial paper – a written promise from one
company to another to pay a specific amount of
money
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Managing Cash
Type of
Security

Maturity

Seller of Security

Interest Rate
5/23/08

Safety Level

Treasury bills

90 days

U.S. Government

1.82%

Excellent

Treasury bills

180 days

U.S. Government

1.87%

Excellent

Commercial
Paper

30 days

Major
Corporations

2.19%

Very Good

CDs

90 days

U.S. commercial
banks

2.62%

Very Good

CDs

180 days

U.S. commercial
banks

2.80%

Very Good

Eurodollars

90 days

European

commercial banks

2.75%

Very Good

Short-term Investment Possibilities for Idle Cash
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Managing Cash

Eurodollar market – a market created in London
for trading U.S. dollars in foreign countries.

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Accounts Receivable

Accounts Receivable – money owed to a business
by credit customers.

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Optimizing Inventory

Optimizing inventory – minimize firm’s investment
in inventory without experiencing production

cutbacks.

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Maximizing Current Liabilities

Accounts payable – money an organization
owes to suppliers for goods and services.
Trade credit – credit extended by suppliers for
the purchase of their goods and services
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Bank Loans

Line of Credit -- An arrangement by which a
bank agrees to lend a specified amount of
money to an organization upon request
Secured Loans -- Loans backed by collateral that
the bank can claim if the borrowers do not
repay the debt

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Bank Loans

Unsecured loan – loans backed only by the
borrower’s good reputation and previous credit

rating
Prime rate – the interest rate that commercial
banks charge their best customers for short
term loans

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Non-Bank Liabilities
•

Short-term loans from insurance companies, pension funds, money
market funds, or finance companies

•

Factoring organization

– Purchases accounts receivable at a discount
•

Taxes and employees’ wages

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Managing Fixed Assets

Long-term (fixed) assets – production facilities
(plants), offices, and equipment—all of which

are expected to last for many years.

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Budgeting & Planning
Frequently
Occasionally
Rarely

How Reliable is Budgeting and Planning?
21
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Capital Budgeting

Capital budgeting -- is the process of analyzing
the needs of business and selecting the assets
that will maximize its value

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Highest Risk
Introduce a New Product in Foreign Markets (risk
depends on stability of country)
Expand into a New Market

Introduce a New Product in a Familiar Area

Add to a Product Line
Buy New Equipment for
an Established Market
Repair Old Machinery
Lowest Risk

Qualitative Assessment of Capital Budgeting Risk
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Long-term Money
Profitability & Pricing Long Term Money
-Factors to Consider:

–
–
–
–

How much cash will be generated
Cost of financing
Supply of funds available for investment
Accurately identifying opportunities with the greatest
potential for ROI

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Financing with Long-Term Liabilities

•

Debts that will be repaid over a number of years

– Long-term loans
– Bond issues

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